(Corrects to say Nicolazzo earlier withdrew as Kolchinsky’s lawyer in Moody’s item of report published Feb. 29.)
Goldman Sachs Group Inc. (GS), Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM) are among banks warned by federal regulators that they may face civil claims tied to sales of mortgage-backed securities.
Goldman Sachs and Wells Fargo said yesterday that they received Wells notices from the Securities and Exchange Commission, warning that the agency’s staff may recommend enforcement. The SEC has issued such notices to multiple banks including JPMorgan, the nation’s largest, in probes focusing on mortgage securities, said people with knowledge of the matter who asked not to be identified because the communications weren’t public.
Almost four years after mounting mortgage defaults prompted unprecedented government bailouts of the financial system, regulators are still examining how banks packaged and sold home loans to investors. The SEC is looking for evidence that firms failed to disclose underlying credit weaknesses in mortgage pools and delinquencies, Jason Anthony, special counsel for the agency’s structured products unit, said last week. He didn’t identify companies under scrutiny.
Goldman Sachs got a so-called Wells notice Feb. 24 relating to disclosures for a late-2006 offering of $1.3 billion in subprime residential mortgage-backed securities, the company said yesterday in an annual financial report. The New York-based firm said it “will be making a submission to, and intends to engage in a dialogue with, the SEC staff seeking to address their concerns.”
The investment bank paid $550 million in 2010 to settle SEC claims that it misled investors on a mortgage-linked investment in 2007. In that case, the company said it made a “mistake” in omitting disclosures.
Wells Fargo, which revealed the SEC’s warning in an annual report yesterday, said the government has been examining whether it properly described facts and risks in offering documents. Government agencies are also looking at whether the San Francisco-based bank may have violated fair lending laws or other regulations when making home loans, the firm said. The company is providing information requested by various agencies conducting investigations, it said.
Spokesmen for Goldman Sachs, Wells Fargo, New York-based JPMorgan and the SEC either declined to comment on the investigations or didn’t respond to messages.
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Shell Asks U.S. Supreme Court to Bar Human-Rights Suit
The high court in Washington is considering whether companies are exempt from two statutes imposing liability for human-rights violations. Shell, Europe’s biggest oil company, argued yesterday that the Alien Tort Statute, which dates to 1789, can’t be used to sue corporations. The Nigerian plaintiffs claim there’s nothing in the law that limits liability to individuals.
“We do not urge a rule of corporate impunity here,” said Kathleen Sullivan, a lawyer for Shell. “Corporate officers are liable for human-rights violations and for those they direct among their employees. There can also be suits under state law or the domestic laws of nations. But there may not be ATS federal common-law causes of action against corporations.”
The case, Kiobel v. Royal Dutch Petroleum Co., was filed in 2002 by 12 Nigerians claiming they were harmed by “widespread and systematic human rights violations” committed by the regime of the former military dictator Sani Abacha, including torture, executions, illegal detentions and indiscriminate killings in the Ogoni region of the Niger Delta.
Paul Hoffman, who represents the Nigerian plaintiffs, criticized Shell’s position, arguing that “even if these corporations had jointly operated torture centers with the military dictatorship in Nigeria to detain, torture, and kill all opponents of Shell’s operations in Ogoni, the victims would have no claim.”
In a separate lawsuit argued immediately after the Kiobel case, the court considered whether the Torture Victim Protection Act of 1991 exempts organizations, including corporations, from suits over torture. In that case, Asid Mohamad, a U.S. citizen, sued the Palestinian Authority and the Palestine Liberation Organization for the torture and death of his father, a West Bank-born U.S. businessman.
The cases are Kiobel v. Royal Dutch Petroleum Co.,10-1491 and Mohamad v. Palestinian Authority, 11-88, U.S. Supreme Court (Washington).
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EPA Greenhouse Gas Rules Under Scrutiny in Two-Day Hearing
The U.S. Environmental Protection Agency’s limits on vehicle and industrial emissions of greenhouse gases including carbon dioxide are being scrutinized by U.S. judges as a two-day court hearing began in Washington.
The three-judge panel of the U.S. Court of Appeals is considering challenges to the agency’s finding that greenhouse gases are pollutants that endanger human health, and to rules determining when states and industries must comply with regulations curtailing their use.
Companies such as Massey Energy Co., business groups including the U.S. Chamber of Commerce and states led by Texas and Virginia are seeking to stop the agency through more than 60 lawsuits. They argue that the agency relied on biased data from outside scientists, including some affiliated with the so-called climategate scandal.
“Everything flows from the endangerment finding,” said Robert Brenner, a senior fellow at the Nicholas Institute at Duke University and a former EPA official. Overturning that determination “will be the most difficult for the industry to get a finding from the court.”
In 2007, the Supreme Court ruled that the EPA had authority to regulate greenhouse gases such as carbon dioxide and methane under the Clean Air Act if the agency declared them a public danger. The EPA issued a so-called endangerment finding in December 2009, clearing the way for regulation of emissions from power plants, factories and other sources linked to global climate change.
The arguments have been split into three parts. The panel heard arguments yesterday on the endangerment finding and challenges to a 2010 rule on emissions from motor vehicles that opponents said improperly sets greenhouse-gas standards for stationary sources, such as steel mills and power plants.
Today, the court will consider challenges to the EPA’s “tailoring rule,” which limits the businesses covered by carbon regulation and phases in controls.
The agency aims to phase in industrial polluters covered by the carbon rules through 2016. Imposing restrictions all at once and without exceptions would be “absurd,” EPA Administrator Lisa Jackson has said.
The EPA argued in court filings that the tailoring rule is acceptable under the Clean Air Act and necessary to avoid states being overrun with permit requests.
The case is Coalition for Responsible Regulation Inc. v. Environmental Protection Agency, 09-1322, U.S. Court of Appeals, District of Columbia (Washington).
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Forrest Appeals to Australia’s Top Court to Keep Fortescue Post
Forrest faces removal from his chairman post after the Australian Securities and Investment Commission won an appeals court ruling last year that said he and Fortescue, the country’s third-biggest exporter of iron ore, broke regulatory rules and misled shareholders with a description of contracts with three Chinese companies. He’s appealing to the highest court in the land to reverse that decision.
The High Court’s ruling will have ramifications for corporate directors in Australia beyond Forrest and Fortescue after the appeals court narrowed the extent to which directors and executives can rely on business judgment for decisions, said Georgie Farrant, a partner at Baker & McKenzie in Sydney.
The issue of business judgment is “one of the big things we’re hoping to get guidance on from the High Court,” said Farrant, who isn’t involved in the case. “It’s the first time the High Court has an opportunity to look at this issue.”
The appeals court ruled that business judgment isn’t a defense for making an inaccurate disclosure to shareholders.
The appeal case is Australian Securities and Investments Commission v. Fortescue Metals Group Ltd., WAD23/2010, Federal Court of Australia, Full Court (Perth).
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Bodog Founder Indicted for $100 Million Gambling Business
Calvin Ayre, a Canadian who founded online-gambling company Bodog in 1994, was indicted by U.S. prosecutors in Baltimore for conducting an illegal business that generated more than $100 million in winnings.
Ayre, 50, and three other men are accused of conspiring to commit money laundering while conducting the business from at least June 2005 until Jan. 6, according to court papers unsealed yesterday in Baltimore. Ayre and the men, all Canadian citizens, allegedly moved funds from Bodog’s accounts in Switzerland, England, Malta, Canada and elsewhere to pay winnings to gamblers and media brokers in the U.S.
“Sports betting is illegal in Maryland and federal law prohibits bookmakers from flouting that law simply because they are located outside the country,” U.S. Attorney Rod J. Rosenstein said in a statement.
A former employee of Bodog told prosecutors that the company had hundreds of workers in Canada and Costa Rica who handle the daily operations of taking bets, tracking sports events, customer service and financial transactions, according to a court filing.
Federal prosecutors also seized the Internet domain name bodog.com. Ayre and his co-conspirators paid more than $42 million from 2005 to 2008 for an advertising campaign to attract U.S. gamblers to the website, prosecutors said.
The domain name isn’t currently in use, Ayre’s BodogBrand said in a statement posted on Calvinayre.com. The domain had been licensed to Morris Mohawk Gaming Group since 2009. BodogBrand.com revoked the licensing agreement in December, according to the statement.
“Bodog UK, Bodog Europe and Bodog Asia have never taken bets from the U.S.,” according to the statement. “The BodogBrand is currently consulting with its legal advisers with a view to having the domain returned.”
If convicted, Ayre and his co-defendants face a maximum of five years in prison for conducting the gambling business and 20 years in prison for money-laundering conspiracy. The men aren’t in custody and no court appearances have yet been scheduled, Vickie LeDuc, a spokeswoman for Rosenstein, said.
The case is U.S. v. Bodog Entertainment Group SA, U.S. District Court for the District of Maryland (Baltimore).
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Moody’s Must Face Ex-Analyst Kolchinsky’s Suit, Judge Rules
Moody’s Corp. (MCO) must face a lawsuit by former analyst Eric Kolchinsky, who claimed the firm slashed his pay and cut his duties after he questioned how his colleagues were rating collateralized debt obligations.
Kolchinsky, the former head of the structured-products group at Moody’s that rated CDOs, claims in his lawsuit that Moody’s retaliated against him after he said it was failing to properly rate the securities. The securities collapsed in value with the spike in home mortgage defaults in 2008.
“Kolchinsky has sufficiently alleged that Moody’s took ‘unfavorable personnel action’ against him after he reported what he believed were potential violations of the federal securities laws,” U.S. District Judge Paul Crotty in Manhattan said in a 15-page opinion yesterday.
Crotty didn’t rule on the merits of Kolchinsky’s lawsuit and dismissed some claims, including defamation and intentional infliction of emotional distress. The judge allowed to proceed a claim under the 2002 Sarbanes-Oxley Act that protects employees who report possible violations of securities laws.
“We are extremely pleased that the court dismissed all but one of the plaintiff’s claims, and we are confident that we will prevail on the remaining claim once the court has looked at all of the facts,” New York-based Moody’s said in an e-mailed statement.
Adam Nicolazzo, a lawyer for Kolchinsky before he withdrew from the case Nov. 3 according to court records, didn’t return a phone call seeking comment on the decision.
Khan May Testify Against Whitman Capital Founder, U.S. Says
Roomy Khan, the former Intel Corp. (INTC) executive who aided the prosecution of hedge fund manager Raj Rajaratnam, may be called as a witness in Whitman Capital LLC founder Doug Whitman’s insider trading case, prosecutors said.
If Khan testifies against Whitman, it will be the first time she has appeared as a government witness at trial. While Khan was a key informant for the government in its prosecution of Rajaratnam for insider trading, she never testified at the trial of the Galleon Group LLC co-founder last year in New York.
Another possible witness against Whitman is Karl Motey, an independent consultant from California who pleaded guilty and has testified at another insider-trading trial in New York, the U.S. said Feb. 27 in a filing in federal court in Manhattan. The government also disclosed that it may call a third witness, an unidentified New York business person who has cooperated in a federal investigation of insider trading.
The third person was described in the filing by prosecutors as a “parallel tippee of Roomy Khan’s” who received “inside information” about Google Inc. (GOOG) “around the same time as Whitman.”
Whitman was indicted Feb. 10 on charges that he part in two separate insider-trading conspiracies, allegedly using illegal tips on Google, Polycom Inc. (PLCM) and Marvell Technology Group Ltd. (MRVL) to make more than $900,000 for his Menlo Park, California-based hedge fund.
He’s charged with two counts of conspiracy to commit securities fraud and two counts of securities fraud. If convicted, he faces as long as five years in prison on each conspiracy charge and 20 years on each securities fraud charge.
U.S. District Judge Jed Rakoff in New York, who is presiding over the case, has scheduled a hearing for today on Whitman’s request to move the case to California. A trial is scheduled for July 30 in New York, court records show.
The criminal case is U.S. v. Whitman, 12-cr-00125; the civil case is Securities and Exchange Commission v. Whitman, 12- cv-01055, U.S. District Court, Southern District of New York (Manhattan).
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Credit Agricole Indosuez Wins Reversal of Job Case Retrial Credit Agricole Indosuez (ACA) won reversal of a 2010 verdict in favor of an ex-analyst who said the bank interfered with his bid for a job at Dreyfus Corp. (399423Q)
U.S. District Judge Thomas P. Griesa in New York abused his discretion in 2009 by tossing the original verdict and granting a retrial of a suit filed by William Raedle, the federal appeals court in Manhattan ruled yesterday. The trial judge concluded the verdict was “impossible to accept with the weight of the evidence.”
Raedle sued the unit of Credit Agricole SA, France’s second-largest bank, in 2004, saying his former employer wrongfully interfered with his effort to win a job at Dreyfus. Raedle, who was fired from the Credit Agricole in 2001 for poor performance, alleged that his supervisor at the bank told a prospective boss at Dreyfus Corp. that he had “mental issues” and that cost him the job.
Griesa reversed a verdict in favor of Credit Agricole after the first trial in 2009, ruling that the jury’s decision was “drastically wrong” and “would result in a serious injustice” if allowed to stand.
Raedle prevailed in a second trial in 2010. A federal court jury found that the bank had interfered with Raedle’s bid for a new job and awarded about $2.4 million in damages.
The appeals court ordered the original verdict in the bank’s favor restored.
Mary Guzman, a spokeswoman for Credit Agricole, didn’t immediately reply to a voice-mail message seeking comment.
The case is Raedle v. Credit Agricole, 04-cv-2235, U.S. District Court, Southern District of New York (Manhattan). The appeal is Raedle v. Credit Agricole Indosuiz, 10-2565, U.S. Court of Appeals for the Second Circuit (New York).
Macy’s Asks to Reject Martha Stewart Living Counterclaims
Macy’s Inc. (M) asked a court to reject counterclaims by Martha Stewart Living Omnimedia Inc. in their legal dispute over a plan to open mini-boutiques in department stores operated by J.C. Penney Co. (JCP)
Macy’s sued in January to stop New York-based Martha Stewart Living from executing the agreement to sell merchandise in J.C. Penney stores. Macy’s, based in Cincinnati, said it has the exclusive right to sell Martha Stewart-branded products in certain categories.
Martha Stewart Living defended its agreement with J.C. Penney in counterclaims filed earlier this month, accusing Macy’s of breach of contract and saying that the retailer has stocked and priced Martha Stewart products in a manner that favors Macy’s own private-label brands.
Macy’s said in court papers filed Feb. 27 in New York state Supreme Court in Manhattan that the proportion of sales for exclusive and limited distribution brands, including those that the retailer licenses from third parties such as Martha Stewart Living (MSO) has increased since 2007, while the proportion of sales for its private labels has remained about the same.
Jeanne Meyer, a spokeswoman for Martha Stewart Living, declined immediate comment on the court papers filed by Macy’s.
The case is Macy’s Inc. v. Martha Stewart Living Omnimedia Inc., 650197/2012, New York state Supreme Court (Manhattan).
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TD Bank Settles Lawsuit With Razorback Over Rothstein Fraud
Toronto Dominion Bank (TD) agreed to settle a lawsuit with investors who claimed it aided a $1.2 billion Ponzi scheme run by imprisoned confidence man Scott Rothstein, a lawyer said in court.
Barron’s and the Miami Herald reported that TD Bank would pay $170 million. A bank attorney told Judge Jeffrey E. Streitfeld yesterday in state court in Fort Lauderdale, Florida, that a draft settlement was reached and is confidential. The accord is with investors known as the Razorback Group.
“We have settled,” Glenn Goldstein, an attorney for the bank, said. Goldstein and Bill Scherer, attorney for the investors, both told the judge that they believe the settlement is “enforceable,” though it hadn’t been signed. The investors claimed losses of $188 million.
The case was scheduled for trial next week. Razorback’s suit against Gibraltar Private Bank & Trust is still set to go to trial next week. Gibraltar’s attorney argued yesterday that the terms of the TD settlement should be made public. Streitfeld said he expects to rule March 2 on whether it can remain confidential.
“We feel it is in the bank’s best interest to put this matter behind us,” Rebecca Acevedo, a spokeswoman for Toronto- based TD Bank, said in an e-mail.
Rothstein, 49, is a disbarred attorney serving 50 years in prison for a scheme he ran out of his Fort Lauderdale law firm. He sold stakes to investors in fictitious employment- and sex- discrimination cases. Seven other people have been criminally charged.
The case is Razorback Funding LLC v. Rothstein, 09-062943, 17th Judicial Circuit in Broward County (Fort Lauderdale).
German EFSF Panel’s Powers Limited to Bond Sales by Court
Germany’s top court restricted the powers of a parliamentary committee set up to approve emergency actions by the euro rescue fund, limiting them to authorizing some government bond purchases.
The Federal Constitutional Court struck down most of the rules that allowed the panel to make decisions in situations deemed urgent or confidential, court President Andreas Vosskuhle said in Karlsruhe yesterday. The ruling means Chancellor Angela Merkel must get approval from the full Bundestag, parliament’s lower house, in most cases related to the European Financial Stability Facility.
The nine-member, all-party subcommittee was established last year to comply with a Sept. 7 constitutional court ruling that upheld the Bundestag’s authority over budgetary aspects of the EFSF. The 440-billion-euro ($591 billion) EFSF is Europe’s main bailout fund, set up in May 2010 to help finance indebted states. It’s scheduled to be replaced by the European Stability Mechanism this year.
“It remains a ‘technicality’ but it demonstrates that the court remains a key hurdle with regard to the debt crisis, and has a high ‘nuisance power,’” Thomas Costerg, an economist at Standard Charted Bank, said in an e-mailed statement. “There is a dilemma between the need for democratic accounting and the need for efficiency and speed: gathering the Bundestag for each EFSF money disbursement is quite cumbersome.”
The court said in a written judgment that in cases of a “heightened emergency” when the full parliament can’t be assembled, it may be permissible to have decisions approved by the 41-member budgetary committee. The budget panel better mirrors the composition of the Bundestag and can review EFSF issues when a quorum is present, the court said.
Deputy Finance Minister Steffen Kampeter told television station N24 that the ruling wasn’t a defeat. The judges allow parliament to make some decisions in a smaller group and his ministry will work with lawmakers on rules that will comply with the requirements outlined by the court, he said.
Lawmakers Swen Schulz and Peter Danckert, from the opposition Social Democratic Party, had filed the suit challenging the committee’s authority.
The case is: BVerfG, 2 BvE 8/11.
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Royal Bank Co-Owned Firms With Municipal Tax Lien Conspirator
Royal Bank America, which operates 15 branches in Pennsylvania and New Jersey, co-owned two firms with a lawyer who pleaded guilty to conspiring to rig bids at municipal tax lien auctions, Bloomberg News’ David Glovin and David Voreacos report.
Attorney Robert W. Stein, of Huntingdon Valley, Pennsylvania, was one of two men who admitted last week that he schemed to eliminate competition by allocating bids at public auctions by the state’s municipalities.
Stein was a 40 percent owner of Crusader Servicing Corp. and Royal Tax Lien Services, said Colm F. Connolly, a lawyer for the two companies. Royal Bank, a unit of Royal Bancshares of Pennsylvania Inc., owns 60 percent of the Jenkintown, Pennsylvania-based companies, according to filings with the U.S. Securities and Exchange Commission.
“Both entities have been cooperating with the government,” Connolly, of Philadelphia-based Morgan Lewis & Bockius LLP, said Feb. 27 in an interview. He said Stein was “effectively terminated” as president of the two companies in November 2010.
Court papers from Stein’s Feb. 23 guilty plea in Newark, New Jersey, don’t identify his companies, saying only that he was president of Pennsylvania corporations -- identified as Company 1 and a successor, Company 2 -- that bought liens.
David M. Farber, of Cherry Hill, New Jersey, also pleaded guilty. Stein and Farber are cooperating in a U.S. Justice Department antitrust probe, prosecutors say.
They are among five men who have pleaded guilty in New Jersey since August. Stein’s lawyer, Paul Zoubek, didn’t return calls seeking comment on the cases. Farber’s attorney, Michael Mustokoff, declined to comment. At least three people have pleaded guilty to similar charges in Maryland.
Stein, Farber and others agreed not to bid against one another at auctions, prosecutors said. That rewarded their firms with higher interest on liens they bought while forcing property owners to pay more to retire their tax debts, prosecutors said.
Marc Sanders, a spokesman for Narbeth, Pennsylvania-based Royal Bank, declined to comment.
The cases are U.S. v. Stein and U.S. v. Farber, U.S. District Court, District of New Jersey (Newark).
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Goodwin Procter Hires Ex-U.S. Attorney for White-Collar Practice
Goodwin Procter LLP (1176L), the Boston-based law firm, hired William J. Harrington, a Manhattan federal prosecutor, for its expanding white-collar crime practice.
Harrington, 38, was an assistant U.S. attorney in the criminal division of the Southern District of New York. He assisted in the conviction of investment adviser Kenneth I. Starr, and the bribery conviction of former New York State Senator Carl Kruger, Goodwin said in a statement.
Harrington also served as the criminal health-care fraud coordinator under U.S. Attorney Preet Bharara in the Southern District.
He will join Goodwin’s New York office as a member of its white-collar crime and government investigations practice.
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On the Docket
South African Court to Rule March 9 on Wal-Mart’s Massmart Deal
South Africa’s Competition Appeal Court will announce its decision March 9 on a challenge by the government and labor leaders against Wal-Mart Stores Inc. (WMT)’s purchase of Massmart Holdings Ltd. (MSM)
Judge Dennis Davis, the president of the court, will hand down the ruling at its chambers in Cape Town, Lerato Motaung, the court registrar, said by phone from Pretoria yesterday.
Three government ministries and a retail workers’ union are contesting a decision May 31 by South Africa’s Competition Tribunal that authorized Wal-Mart to buy a 51 percent stake in Johannesburg-based Massmart, South Africa’s biggest food and general-goods wholesaler. Approval was subject to the companies promising to refrain from firing employees for two years and setting up a fund to assist local suppliers and manufacturers.
The appeal contends that the regulatory hearings were procedurally flawed and that the tribunal failed to take account of the takeover’s potentially negative economic effects.
Wal-Mart, the world’s largest retailer, paid 16.5 billion rand ($2.19 billion) in mid-2011 for the stake in Massmart. The Bentonville, Arkansas-based company said on June 26 that it would create 15,000 jobs in South Africa in five years and spend about 60 billion rand more on food or fast-moving consumer goods in the period, most of which would go to local suppliers.
The case is South Africa Commercial, Catering and Allied Workers Union v Wal-Mart Stores Inc. and Massmart Holdings Ltd., 111/CAC/Jul11.
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